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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2004
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to _________
Commission File Number 1-12031
UNIVERSAL DISPLAY CORPORATION
-----------------------------
(Exact name of registrant as specified in its charter)
Pennsylvania 23-2372688
------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
375 Phillips Boulevard
Ewing, New Jersey 08618
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(609) 671-0980
----------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes __X__ No ____
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act):
Yes __X__ No ____
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
As of August 2, 2004, the registrant had outstanding 27,494,966 shares of common
stock.
TABLE OF CONTENTS
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets - June 30, 2004 (unaudited) and December 31, 2003 3
Consolidated Statements of Operations - Three months ended June 30, 2004 4
and 2003 and inception to June 30, 2004 (unaudited)
Consolidated Statements of Operations - Six months ended June 30, 2004 5
and 2003 and inception to June 30, 2004 (unaudited)
Consolidated Statements of Cash Flows - Six months ended June 30, 2004 6
and 2003 and inception to June 30, 2004 (unaudited)
Notes to Consolidated Financial Statements (unaudited) 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 13
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 16
ITEM 4. CONTROLS AND PROCEDURES 16
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 17
ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY SECURITIES 17
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 17
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 17
ITEM 5. OTHER INFORMATION 18
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 18
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
UNIVERSAL DISPLAY CORPORATION AND SUBSIDIARY
(a development-stage company)
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2004 DECEMBER 31,
(UNAUDITED) 2003
------------- -------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 18,264,308 $ 14,070,207
Short-term investments 36,556,385 12,811,704
Accounts receivable 1,139,782 805,602
Inventory 20,853 33,044
Other current assets 377,967 153,924
------------- -------------
Total current assets 56,359,295 27,874,481
PROPERTY AND EQUIPMENT, net 2,945,059 3,532,115
ACQUIRED TECHNOLOGY, net 10,557,167 11,404,703
INVESTMENTS 2,726,637 3,255,574
OTHER ASSETS 128,209 134,773
------------- -------------
$ 72,716,367 $ 46,201,646
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Capital lease obligations $ 1,335 $ 3,886
Accounts payable 340,265 436,809
Accrued expenses 2,329,315 2,020,210
Deferred license fees 1,516,667 1,266,667
Deferred revenue 317,204 467,204
------------- -------------
Total current liabilities 4,504,786 4,194,776
DEFERRED LICENSE FEES 3,100,000 3,100,000
------------- -------------
Total liabilities 7,604,786 7,294,776
COMMITMENTS AND CONTINGENCIES (Note 7)
SHAREHOLDERS' EQUITY:
Preferred Stock, par value $0.01 per share, 5,000,000 shares authorized,
200,000 shares Series A Nonconvertible Preferred Stock issued and
Outstanding (liquidation value of $7.50 per share or $1,500,000), 300,000
shares Series B Convertible Preferred Stock issued and outstanding
(liquidation value of $21.48 per share or $6,444,000), 5,000 shares of
Series C-1 Convertible Preferred Stock authorized and none outstanding,
5,000 shares of Series D Convertible Preferred Stock authorized and none
outstanding 5,000 5,000
Common Stock, par value $.01 per share, 50,000,000 shares authorized,
27,416,185 and 24,196,765 shares issued and outstanding, respectively 274,162 241,968
Additional paid-in capital 172,190,491 137,160,751
Deferred compensation (186,398) --
Accumulated other comprehensive loss (81,788) (38,837)
Deficit accumulated during development stage (107,089,886) (98,462,012)
------------- -------------
Total shareholders' equity 65,111,581 38,906,870
------------- -------------
$ 72,716,367 $ 46,201,646
============= =============
The accompanying notes are an integral part of these statements.
3
UNIVERSAL DISPLAY CORPORATION AND SUBSIDIARY
(a development-stage company)
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
THREE MONTHS ENDED JUNE 30, PERIOD FROM INCEPTION
-------------------------------- (JUNE 17, 1994) TO
2004 2003 JUNE 30, 2004
REVENUE:
Contract research $ 884,942 $ 468,206 $ 6,720,378
Development chemicals 259,081 696,592 4,377,972
Commercial chemicals 23,400 -- 157,980
License fees 54,600 -- 368,620
Technology development fees 250,000 250,000 3,782,796
------------ ------------ -------------
Total revenue 1,472,023 1,414,798 15,407,746
OPERATING EXPENSES:
Cost of chemicals sold 59,986 64,842 267,726
Research and development 4,321,227 4,180,697 73,771,983
General and administrative 1,758,785 1,239,481 29,719,100
Royalty expense 83,421 87,500 850,000
------------ ------------ -------------
Total operating expenses 6,223,419 5,572,520 104,608,809
------------ ------------ -------------
Operating loss (4,751,396) (4,157,722) (89,201,063)
INTEREST INCOME 231,184 53,890 2,579,450
INTEREST EXPENSE (60) (194) (5,146,889)
DEBT CONVERSION AND EXTINGUISHMENT EXPENSE -- -- (10,011,780)
OTHER INCOME -- 11,032 241,689
------------ ------------ -------------
NET LOSS (4,520,272) (4,092,994) (101,538,593)
DEEMED DIVIDEND -- -- (5,551,293)
------------ ------------ -------------
NET LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS $ (4,520,272) $ (4,092,994) $(107,089,886)
============ ============ =============
BASIC AND DILUTED NET LOSS PER COMMON SHARE $ (0.17) $ (0.19)
WEIGHTED AVERAGE SHARES USED IN COMPUTING BASIC AND DILUTED
NET LOSS PER COMMON SHARE 27,286,654 21,654,133
The accompanying notes are an integral part of these statements.
4
UNIVERSAL DISPLAY CORPORATION AND SUBSIDIARY
(a development-stage company)
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
SIX MONTHS ENDED JUNE 30, PERIOD FROM INCEPTION
-------------------------------- (JUNE 17, 1994) TO
2004 2003 JUNE 30, 2004
REVENUE:
Contract research $ 1,297,174 $ 837,353 $ 6,720,378
Development chemicals 1,055,439 1,316,053 4,377,972
Commercial chemicals 89,820 -- 157,980
License fees 209,580 -- 368,620
Technology development fees 950,000 500,000 3,782,796
------------ ------------ -------------
Total revenue 3,602,013 2,653,406 15,407,746
OPERATING EXPENSES:
Cost of chemicals sold 117,547 122,503 267,726
Research and development 8,644,943 8,108,248 73,771,983
General and administrative 3,608,192 2,338,462 29,719,100
Royalty expense 175,000 175,000 850,000
------------ ------------ -------------
Total operating expenses 12,545,682 10,744,213 104,608,809
------------ ------------ -------------
Operating loss (8,943,669) (8,090,807) (89,201,063)
INTEREST INCOME 362,129 113,453 2,579,450
INTEREST EXPENSE (158) (418) (5,146,889)
DEBT CONVERSION AND EXTINGUISHMENT EXPENSE -- -- (10,011,780)
OTHER INCOME -- 16,032 241,689
------------ ------------ -------------
NET LOSS (8,581,698) (7,961,740) (101,538,593)
DEEMED DIVIDEND (46,176) -- (5,551,293)
------------ ------------ -------------
NET LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS $ (8,627,874) $ (7,961,740) $(107,089,886)
============ ============ =============
BASIC AND DILUTED NET LOSS PER COMMON SHARE $ (0.33) $ (0.37)
WEIGHTED AVERAGE SHARES USED IN COMPUTING BASIC AND DILUTED
NET LOSS PER COMMON SHARE 25,986,863 21,595,360
The accompanying notes are an integral part of these statements.
5
UNIVERSAL DISPLAY CORPORATION AND SUBSIDIARY
(a development-stage company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
SIX MONTHS ENDED JUNE 30, PERIOD FROM INCEPTION
-------------------------------- (JUNE 17, 1994) TO
2004 2003 JUNE 30, 2004
------------ ------------ ---------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (8,581,698) $ (7,961,740) $(101,538,593)
Non-cash charges to statement of operations:
Depreciation 658,418 1,039,833 6,388,281
Amortization of intangibles 847,536 847,536 6,393,551
Amortization of discounts on Convertible Promissory Note -- -- 14,734,168
Amortization of premium on investments 52,168 -- 113,258
Issuance of Common Stock options and warrants for services (3,643) 25,254 1,684,759
Issuance of Common Stock and warrants in connection
with amended research and license agreements -- -- 3,120,329
Issuance of Common Stock in connection with
employee bonus 167,116 -- 874,079
Issuance of redeemable Common Stock, Common Stock options and
warrants in connection with the PPG development agreement 1,929,221 2,294,468 16,467,610
Issuance of Common Stock, options and warrants to Board of
Directors and Scientific Advisory Board 643,720 -- 2,591,089
Issuance of Common Stock in connection with License Agreement -- -- 71,816
Acquired in-process technology -- -- 350,000
(Increase) decrease in assets:
Accounts receivable (334,180) 46,802 (1,139,782)
Inventory 12,191 -- (20,853)
Other current assets (224,043) (159,314) (70,119)
Other assets 6,564 (1,010) (128,209)
Increase (decrease) in liabilities:
Accounts payable and accrued expenses 863,743 460,690 3,311,980
Deferred license fees 250,000 100,000 4,616,667
Deferred revenue (150,000) (5,000) 317,204
------------ ------------ -------------
Net cash used in operating activities (3,862,887) (3,312,481) (41,862,765)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment (71,362) (548,173) (8,451,319)
Purchase of intangibles -- -- (25,750)
Purchases of investments (31,924,540) (7,410,000) (84,010,305)
Proceeds from sale of investments 8,613,677 2,702,192 44,532,237
------------ ------------ -------------
Net cash used in investing activities (23,382,225) (5,255,981) (47,955,137)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of Common Stock, net 28,522,249 -- 74,383,543
Proceeds from issuance of Preferred Stock -- -- 9,137,079
Proceeds from issuance of Convertible Promissory Notes and
equity instruments -- -- 15,000,000
Repayment of Convertible Promissory Notes -- -- (8,819,997)
Proceeds from the exercise of Common Stock options and warrants 2,919,515 341,765 18,400,271
Principal payments on capital lease (2,551) (2,292) (18,686)
------------ ------------ -------------
Net cash provided by financing activities 31,439,213 339,473 108,082,210
------------ ------------ -------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 4,194,101 (8,228,989) 18,264,308
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 14,070,207 15,905,416 --
------------ ------------ -------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 18,264,308 $ 7,676,427 $ 18,264,308
============ ============ =============
The accompanying notes are an integral part of these statements.
6
UNIVERSAL DISPLAY CORPORATION AND SUBSIDIARY
(a development-stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BACKGROUND:
Universal Display Corporation (the "Company"), a development-stage company, is
engaged in the research and development and commercialization of organic light
emitting diode ("OLED") technologies and materials for potential flat panel
display and other applications.
The Company, formerly known as Enzymatics, Inc. ("Enzymatics"), was incorporated
under the laws of the Commonwealth of Pennsylvania on April 24, 1985, and
commenced its current business activities on August 1, 1994. The New Jersey
corporation formerly known as Universal Display Corporation and now known as
UDC, Inc. ("UDC") was incorporated under the laws of the State of New Jersey on
June 17, 1994.
The Company also sponsors substantial OLED technology research being conducted
at the Advanced Technology Center for Photonics and Optoelectronic Materials at
Princeton University and at the University of Southern California ("USC") (on a
subcontract basis with Princeton University), pursuant to a Research Agreement
between the Company and the Trustees of Princeton University dated October 9,
1997 (as amended, the "1997 Research Agreement") (Note 3). The Company
previously sponsored OLED technology research conducted at Princeton University
under a Sponsored Research Agreement between the Trustees of Princeton
University and American Biomimetics Corporation ("ABC") dated August 1, 1994 (as
amended, the "1994 Sponsored Research Agreement"). ABC, a privately held
Pennsylvania corporation that is affiliated with the Company, assigned its
rights and obligations under the 1994 Sponsored Research Agreement to the
Company in October 1995.
Pursuant to a License Agreement between the Trustees of Princeton University and
ABC dated August 1, 1994 (as amended, the "1994 License Agreement"), Princeton
University granted the Company a worldwide exclusive license, with rights to
sublicense, to make, have made, use, lease and/or sell products and to practice
processes based on a pending patent application of Princeton University relating
to OLED technology. Under the 1994 License Agreement, Princeton University
further granted ABC similar license rights with respect to patent applications
and issued patents arising out of work performed by Princeton University under
the 1994 Sponsored Research Agreement. ABC assigned its rights and obligations
under the 1994 License Agreement to the Company in June 1995. On October 9,
1997, the Company and Princeton University entered into an Amended License
Agreement that amended and restated the 1994 License Agreement (as amended, the
"1997 Amended License Agreement") (Note 3). Under the 1997 Amended License
Agreement, Princeton University granted the Company corresponding license rights
with respect to patent applications and issued patents arising out of work
performed by Princeton University and USC under the 1997 Research Agreement.
The Company conducts a substantial portion of its OLED technology development
activities at its technology development and transfer facility in Ewing, New
Jersey. The Company moved its operations to this facility in the fourth quarter
of 1999 and expanded the facility from 11,000 square feet to 21,000 square feet
in 2001. In September 2003, the Company renewed its lease for this facility for
an additional five years through the end of 2008. In connection with renewing
this lease, the Company negotiated an option to purchase the entire facility at
a fixed price, exercisable at any time on or after July 1, 2004.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
INTERIM FINANCIAL INFORMATION
In the opinion of management, the accompanying unaudited consolidated financial
statements contain all adjustments (consisting of only normal recurring
adjustments) necessary to present fairly the financial position as of June 30,
2004, and the results of operations for the three and six months ended June 30,
2004 and 2003 and cash flows for the six months ended June 30, 2004 and 2003.
While management believes that the disclosures presented are adequate to make
the information not misleading, these unaudited consolidated financial
statements should be read in conjunction with the audited consolidated financial
statements and the notes thereto in the Company's latest year-end financial
statements, which were included in the Company's Annual Report on Form 10-K for
the year ended December 31, 2003.
CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
The Company considers all highly liquid debt instruments purchased with an
original maturity of three months or less to be cash equivalents. At June 30,
2004, cash and cash equivalents included cash on hand, cash in banks, money
market accounts, corporate bonds and certificates of deposit.
The Company classifies its existing marketable securities as available-for-sale
in accordance with the provisions of Statement of Financial Accounting Standards
No. 115, "Accounting for Certain Investments in Debt and Equity Securities."
These securities are carried at fair market value, with unrealized gains and
losses reported in shareholders' equity as a component of accumulated other
comprehensive loss. Gains or losses on securities sold are based on the specific
identification method. Investments classified as current have maturity dates of
greater than three months but less than one year. Investments classified as
long-term have maturity dates greater than one year.
7
The Company reported accumulated unrealized holding losses of $81,788 and
$38,837 at June 30, 2004 and December 31, 2003, respectively. Comprehensive
loss, which includes the net loss and change in unrealized holding losses, was
$8,624,649 and $7,958,450 for the six months ended June 30, 2004 and 2003,
respectively, and $4,571,241 and $4,086,570 for the three months ended June 30,
2004 and 2003, respectively. The gross proceeds from sales and maturities of
investments were $8,613,677 and $2,702,192 for the six months ended June 30,
2004 and 2003, respectively, and $4,976,514 and $1,838,000 for the three months
ended June 30, 2004 and 2003, respectively. Gross realized gains and losses for
the quarter ended June 30, 2004 and 2003 were not material.
INVENTORY
Inventory consists of chemicals held at the Company's location. Inventory is
valued at the lower of cost or market, with the cost determined using the
specific identification method.
ACQUIRED TECHNOLOGY
Acquired technology consists of acquired license rights for patents and know-how
obtained from PD-LD, Inc. and Motorola, Inc. (Note 4). These intangible assets
consist of the following:
June 30, 2004 December 31, 2003
------------ -----------------
PD-LD, Inc. $ 1,481,250 $ 1,481,250
Motorola 15,469,468 15,469,468
------------ ------------
16,950,718 16,950,718
Less: Accumulated amortization (6,393,551) (5,546,015)
------------ ------------
Acquired Technology, net $ 10,557,167 $ 11,404,703
============ ============
Acquired technology is amortized on a straight-line basis over its estimated
useful life of ten years.
NET LOSS PER COMMON SHARE
Basic net loss per common share is computed by dividing net loss attributable to
common stock shareholders by the weighted-average number of shares of common
stock outstanding for the period. Diluted net loss per common share reflects the
potential dilution from the exercise, or conversion of securities into common
stock. For the three and six months ended June 30, 2004 and 2003, the effects of
the exercise of 8,416,697 and 8,120,924 outstanding stock options and warrants,
respectively, were excluded from the calculation of diluted EPS as the impact
would be antidilutive.
RESEARCH AND DEVELOPMENT
Expenditures for research and development are charged to operations as incurred.
CERTAIN RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the current year
presentation.
RECENT ACCOUNTING PRONOUNCEMENTS
The EITF recently reached a consensus on EITF Issue No. 00-21, which provides
accounting guidance for customer solutions where delivery or performance of
products, services and/or performances may occur at different points in time or
over different periods of time. Companies are required to adopt this consensus
for fiscal periods beginning after June 15, 2003. The adoption of EITF Issue No.
00-21 had no impact on the Company's financial position, results of operations
or liquidity.
8
STATEMENT OF CASH FLOW INFORMATION
The following non-cash investing and financing activities occurred:
Three Months Ended June 30,
2004 2003
---------- ---------
Unrealized gain (loss) on available-for-sale securities $ (50,969) $ 6,424
Six Months Ended June 30,
2004 2003
---------- ---------
Unrealized gain (loss) on available-for-sale securities $ (42,951) $ 3,290
STOCK OPTIONS
The Company accounts for its stock option plans under Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees," ("APB No. 25")
under which no compensation cost is recognized for options issued to employees
at fair market value on the date of grant. In 1995, the FASB issued SFAS No.
123, "Accounting for Stock-Based Compensation," which established a fair value
based method of accounting for stock-based compensation plans. SFAS No. 123
requires that a company's financial statements include certain disclosures about
stock-based employee compensation arrangement regardless of the method used to
account for the plan. In 2003, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation-Transition and Disclosure," which amended SFAS No. 123
to provide alternative methods of transition for a voluntary change to the fair
value method of accounting for stock-based employee compensation and amended the
disclosure requirements of SFAS No. 123 to require prominent disclosures in both
annual and interim financial statements.
As allowed by SFAS No. 123, the Company has selected to continue to account for
its employee stock-based compensation plans under APB No. 25, and adopted only
disclosure requirements of SFAS No. 123 as amended by SFAS No. 148. Had the
Company recognized compensation cost for it stock-based compensation plans
consistent with the provisions of SFAS No. 123, the Company's net loss and net
loss per share would have been increased to the following pro forma amounts:
Three months ended June 30,
-----------------------------------
2004 2003
------------ -------------
Net loss attributable to common shareholders:
As reported $ (4,520,272) $ (4,092,994)
Add stock-based employee compensation
expense included in reported net income, net of tax 386,787 --
Deduct total stock-based employee compensation
expense determined under fair-value-based
method for all rewards, net of tax (682,700) (239,229)
------------ -------------
Pro forma $ (4,816,185) $ (4,332,223)
============ =============
Basic and diluted net loss per share:
As reported $ (0.17) $ (0.19)
Pro forma (0.18) (0.20)
Six months ended June 30,
-----------------------------------
2004 2003
------------ -------------
Net loss attributable to common shareholders:
As reported $ (8,627,874) $ (7,961,740)
Add stock-based employee compensation
expense included in reported net income, net of tax 1,116,856 --
Deduct total stock-based employee compensation
expense determined under fair-value-based
method for all rewards, net of tax (5,449,684) (491,865)
------------ -------------
Pro forma $(12,960,702) $ (8,453,605)
============ =============
Basic and diluted net loss per share:
As reported $ (0.33) $ (0.37)
Pro forma (0.50) (0.39)
9
The year-to-date 2004 amounts are primarily due to the Company granting
immediately vested bonus options to executive management for 2003 and options to
its Board of Directors for Board and Committee service in 2003 in the first
quarter of 2004. The Company granted similar options for 2002 in the fourth
quarter of 2002.
The Company accounts for its stock option and warrant grants to non-employees in
exchange for goods or services in accordance with SFAS No. 123 and Emerging
Issues Task Force No. 96-18 ("EITF 96-18"). SFAS No. 123 and EITF 96-18 require
that the Company account for its option and warrant grants to non-employees
based on the fair value of the options and warrants granted.
3. RESEARCH AND LICENSE AGREEMENTS WITH PRINCETON UNIVERSITY:
In April 2002, the Company amended the 1997 Research Agreement with Princeton
University providing, among other things, for an additional five-year term. The
Company is obligated to pay Princeton University up to $7,477,993 under the 1997
Research Agreement from July 31, 2002 through July 31, 2007. Payments to
Princeton University under this agreement are charged to research and
development expenses when they become due. As of June 30, 2004, the Company has
funded $2,220,027 of this agreement and is obligated to fund an additional
$5,257,966 through July 2007.
Under the 1997 Amended License Agreement, the Company is required to pay
Princeton University royalties for licensed products sold by the Company or its
sublicensees. For licensed products sold by the Company, the Company is required
to pay Princeton University 3% of the net sales price of these products. For
licensed products sold by the Company's sublicensees, the Company is required to
pay Princeton University 3% of the revenues received by the Company from these
sublicensees. These royalty rates are subject to renegotiation for products not
reasonably conceivable as arising out of the 1997 Research Agreement if
Princeton University reasonably determines that the royalty rates payable with
respect to these products are not fair and competitive.
The Company is obligated under the 1997 Amended License Agreement to pay to
Princeton University minimum annual royalties. The minimum royalty payment was
$75,000 in 2001 and $100,000 in 2002 and thereafter. The Company accrued $50,000
of royalty expense for the six months ended June 30, 2004. These royalties are
charged to research and development expense in the year they become due.
The Company also is required under the 1997 Amended License Agreement to use
commercially reasonable efforts to bring the licensed OLED technology to market.
However, this requirement is deemed satisfied provided the Company performs its
obligations under the 1997 Research Agreement and, when that agreement ends, the
Company invests a minimum of $800,000 per year in research, development,
commercialization or patenting efforts respecting the patent rights licensed to
the Company.
In connection with executing the Research Agreement and the Amended License
Agreement, in 1997 the Company issued to Princeton University 140,000 shares of
the Company's common stock and immediately vesting 10-year warrants to purchase
an additional 175,000 shares of the common stock at an exercise price of $7.25
per share. The Company also issued to USC 60,000 shares of the common stock and
immediately vesting 10-year warrants to purchase an additional 75,000 shares of
the common stock at an exercise price of $7.25 per share.
4. ACQUIRED TECHNOLOGY:
On July 19, 2000, the Company, PD-LD, Inc. ("PD-LD"), its president Dr. Vladimir
Ban and the Trustees of Princeton University entered into a Termination,
Amendment and License Agreement whereby the Company acquired all PD-LD's rights
to certain issued and pending OLED technology patents in exchange for 50,000
shares of the Company's common stock. Pursuant to this transaction, these
patents were included in the patent rights exclusively licensed to the Company
under the 1997 Amended License Agreement. The acquisition of these patents had a
fair value of $1,481,250 (Note 2).
On September 29, 2000, the Company entered into a License Agreement with
Motorola, Inc. ("Motorola"). Pursuant to this agreement, the Company licensed
from Motorola 74 issued U.S. patents and corresponding foreign patents relating
to OLED technologies. These patents expire between 2012 and 2018. The Company
has the sole right to sublicense these patents to OLED manufacturers. As
consideration for this license, the Company issued to Motorola 200,000 shares of
the Company's common stock (valued at $4,412,500), 300,000 shares of the
Company's Series B Convertible Preferred Stock (valued at $6,618,750), and a
warrant to purchase 150,000 shares of the Company's common stock at $21.60 per
share. This warrant became exercisable on September 29, 2001, and will remain
exercisable until September 29, 2008. The warrant was recorded at a fair market
value of $2,206,234 based on the Black-Scholes option-pricing model, and was
recorded as a component of the cost of the acquired technology. The Company also
issued a warrant to an unaffiliated third party to acquire 150,000 shares of
common stock as a finder's fee in connection with this transaction. This warrant
was granted with an exercise price of $21.60 per share and was exercisable
immediately and will remain exercisable until September 29, 2007. This warrant
was accounted for at its fair value based on the Black-Scholes option pricing
model and $2,206,234 was recorded as a component of the cost of the acquired
technology. The Company used the following assumptions in the Black-Scholes
option pricing model for the warrants to purchase 300,000 shares issued in
connection with this transaction: (1) 6.3% risk-free interest rate, (2) expected
life of seven years, (3) 60% volatility, and (4) zero expected dividend yield.
In addition, the Company incurred $25,750 of direct cash transaction costs that
have been included in the cost of the acquired technology. In total, the Company
recorded an intangible asset of $15,469,468 for the technology acquired from
Motorola (Note 2).
10
The Company is required under the License Agreement to pay Motorola on gross
revenues earned by the Company for its sales of OLED products or components, or
from its sublicensees for their sales of OLED products or components, whether or
not these products or components are based on inventions claimed in the patent
rights licensed from Motorola. Moreover, the Company is required to pay Motorola
minimum royalties of $150,000 for the two-year period ending on December 31,
2002, $500,000 for the two-year period ending on December 31, 2004, and
$1,000,000 for the two-year period ending on December 31, 2006. All royalty
payments may be made, at the Company's discretion, in either all cash or 50%
cash and 50% in shares of the Company's common stock. The number of shares of
common stock used to pay the stock portion of the royalty is equal to 50% of the
royalty due divided by the average daily closing price per share of the
Company's common stock over the 10 trading days ending two business days prior
to the date the common stock is issued. Since the minimum royalty exceeded the
actual royalties for the six months ended June 30, 2004, the Company accrued
$125,000 of royalty expense.
5. COMMON STOCK AND WARRANTS ISSUED UNDER THE PPG DEVELOPMENT AND LICENSE
AGREEMENT:
On October 1, 2000, the Company entered into a five-year Development and License
Agreement with PPG Industries, Inc. ("PPG") to leverage the Company's OLED
technologies with PPG's expertise in the development and manufacturing of
organic materials. A team of PPG scientists and engineers is assisting the
Company in developing and commercializing its proprietary OLED materials. In
consideration for PPG's services under the agreement, the Company is required to
issue shares of its common stock and warrants to acquire its common stock to PPG
on an annual basis over the period from January 1, 2001 through December 31,
2005. The amount of securities the Company is required to issue is subject to
adjustment under certain circumstances, as defined in the agreement. In January
2003, the Company amended the Development and License Agreement, providing for
additional consideration to PPG for services provided under the agreement, which
are to be paid for in cash. The Company records these expenses to research and
development as they are incurred.
During the respective first quarters of 2004 and 2003, the Company issued to PPG
157,609 and 305,715 shares of the Company's common stock as consideration for
services required to be provided by PPG under the Development and License
Agreement. During the six months ended June 30, 2004 and 2003, respectively, the
Company recorded a charge of $1,048,251 and $1,212,508 to research and
development expense for the portion of the shares issued that were earned during
the period the services were provided. The charge was determined based on the
fair value of the common stock earned by PPG.
As required under the Development and License Agreement, the Company issued
9,746 shares of common stock to PPG in February 2004. The additional shares were
issued to PPG based on a final accounting for actual costs incurred by PPG under
the agreement for the year ended December 31, 2003. Accordingly, the Company
accrued $133,715 of additional research and development expense as of December
31, 2003, based on the fair value of these additional shares.
In further consideration of the services performed by PPG under the Development
and License Agreement, the Company is required to issue warrants to PPG to
acquire shares of the Company's common stock. The number of warrants earned and
issued is based on the number of shares of common stock earned by, and issued
to, PPG by the Company during each calendar year of the term of the agreement.
Accordingly, the Company issued warrants to PPG to acquire 315,461 shares of the
Company's common stock as part of the consideration for services performed by
PPG during 2003. The warrants were earned and charged to research and
development expenses during 2003, but were not issued until February 2004. The
Company will similarly issue warrants to PPG for services performed during 2004
in the first quarter of 2005 and will charge the related fair value of the
warrants to research and development in 2004 as they are earned.
During the six months ended June 30, 2004 and 2003, the Company recorded charges
to research and development expense of $768,284 and $956,932, respectively, for
the portion of the warrants that were earned by PPG during these periods. These
charges were recorded based on the estimated fair value of the warrants earned.
The Company determined the fair value of the warrants earned during each such
period using the Black-Scholes option-pricing model with the following
assumptions: (1) risk free interest rate of 3.35%-4.24% and 3.03%-3.35%,
respectively, (2) no expected dividend yield, (3) expected life of seven years
and (4) expected volatility of 94%.
The Company is required to grant options to purchase the Company's common stock
to PPG employees performing services for the Company under the Development and
License Agreement, in a manner consistent with that for issuing options to its
own employees. Subject to certain contingencies, these options vest one year
following the date of grant and expire 10 years from the date of grant.
On September 23, 2002, the Company granted to PPG employees performing services
under the agreement options to purchase 30,000 shares of the Company's common
stock at an exercise price of $5.45. During the six months ended June 30, 2003,
the Company recorded $125,029 in research and development costs related to these
options.
11
On April 20, 2004 and December 23, 2003, the Company granted to PPG employees
performing services under the agreement options to purchase 4,000 and 21,000
shares, respectively, of the Company's common stock at an exercise price of
$13.28 and $13.92, respectively. During the six months ended June 30, 2004, the
Company recorded $112,686 in research and development costs related to these
options.
The Company determined the fair value of the options earned during the six
months ended June 30, 2004 and 2003, using the Black-Scholes option-pricing
model with the following assumptions: (1) risk free interest rate of 4.28%-4.43%
and 3.70%, respectively, (2) no expected dividend yield, (3) expected life of 10
years and (4) expected volatility of 94%.
6. SHAREHOLDERS' EQUITY:
The following table summarizes the shareholders' equity activity from January 1,
2004 through June 30, 2004:
Accumulated
Preferred Stock, Deficit and
Series A & B Common Stock Additional Other
----------------- -------------------- Paid-In Deferred Comprehensive
Shares Amount Shares Amount Capital Compensation Loss Total Equity
----------------- ---------- -------- ---------- ------------ ------------- ------------
BALANCE, JANUARY 1, 2004 500,000 $5,000 24,196,765 $241,968 $137,160,751 $ -- $ (98,500,849) $38,906,870
Exercise of Common Stock
options and warrants -- -- 466,599 4,666 2,914,849 -- -- 2,919,515
Issuance of Common Stock
through Public offering, net
of fees of $2,077,750 -- -- 2,550,000 25,500 28,496,749 -- -- 28,522,249(A)
Deemed dividend -- -- -- -- 46,176 -- (46,176) --(B)
Issuance of Common Stock to
employees -- -- 64,750 647 870,332 (353,513) -- 517,466
Issuance of Common Stock to
Board of Directors and
Scientific Advisory Board -- -- 38,000 380 643,340 -- -- 643,720
Issuance of Common Stock
options to non-employees -- -- -- -- (3,643) -- -- (3,643)
Issuance of Common Stock,
options and warrants in
connection with Development
Agreements -- -- 100,071 1,001 2,061,937 -- -- 2,062,938(C)
Amortization of deferred
compensation -- -- -- -- -- 167,115 -- 167,115
Unrealized gain on available-
for-sales securities -- -- -- -- -- -- (42,951) (42,951)
Net loss -- -- -- -- -- -- (8,581,698) (8,581,698)
-------------------------------------------------------------------------------------------------
BALANCE, June 30, 2004 500,000 $5,000 27,416,185 $274,162 $172,190,491 $(186,398) $(107,171,674) $65,111,581
=================================================================================================
(A) In March 2004 the Company sold 2,500,000 shares of its common stock at
$12.00 per share in a registered underwritten public offering. The offering
resulted in proceeds to the Company of $28,036,218, net of $1,963,782 in
associated costs. In April 2004, the Company sold an additional 50,000
shares of its common stock at $12.00 per share to cover over-allotments in
connection with this public offering. The sale of these additional shares
resulted in proceeds of $486,031, net of $113,968 in associated costs.
(B) In February 2004, the Company issued warrants to PPG and in March 2004, it
sold 2,500,000 shares of its common stock in a public offering. These
transactions were deemed dilutive under the terms of certain warrants the
Company had previously issued and resulted in the reduction of the exercise
price of those warrants and increases in the number of shares issuable
under certain of those warrants. The Company treated this occurrence as a
deemed dividend of $46,176.
(C) In accordance with the PPG Development and License Agreement (Note 5), PPG
earned shares of the Company's common stock and warrants to purchase shares
of the Company's common stock, and options to purchase shares of the
Company's common stock were granted to certain PPG employees, for the six
months ended June 30, 2004.
7. COMMITMENTS AND CONTINGENCIES:
Under the terms of the Company's License Agreement with Motorola (Note 4), the
Company agreed to make minimum royalty payments. To the extent that the
royalties otherwise payable to Motorola under this agreement are not sufficient
to meet the minimums, the Company is required to pay the shortfall, at its
discretion, in all cash or in 50% cash and 50% common stock within 90 days after
the end of each two-year period specified below in which the shortfall occurs.
For the two-year period ending December 31, 2002, the Company issued to Motorola
8,000 shares of the Company's common stock, valued at $71,816, and paid $78,184
in cash as a result of the minimum royalty due of $150,000. Future required
minimum royalty payments are as follows:
January 1, 2003 - December 31, 2004 $ 500,000
January 1, 2005 - December 31, 2006 $1,000,000
12
In accordance with the April 2002 amendment to the 1997 Research Agreement with
the Princeton University, the Company is required to pay annually to Princeton
University up to $1,495,999 from July 31, 2002 through July 31, 2007.
Under the terms of the 1997 Amended License Agreement (Note 3), the Company is
required to pay Princeton University minimum royalty payments. To the extent
that the royalties otherwise payable to Princeton University under this
agreement are not sufficient to meet the minimums, the Company is required to
pay Princeton University the difference between the royalties paid and the
minimum royalty. The minimum royalty was $25,000 in 1999, $50,000 in 2000,
$75,000 in 2001, and is $100,000 in 2002 and each year thereafter.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CAUTIONARY STATEMENT
CONCERNING FORWARD-LOOKING STATEMENTS
The following discussion and analysis of our financial condition and results of
operations should be read in conjunction with the consolidated financial
statements and related notes above. This discussion and analysis contains
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. These include, but are not limited to, statements
regarding our beliefs, expectations, hopes or intentions regarding the future.
It is important to note that these statements are subject to risks and
uncertainties that could cause our actual results to differ materially from
those projected. These risks and uncertainties include, but are not limited to:
the success of alternatives to OLEDs for flat panel displays; the success of
competing OLED technologies, or of other flat panel display technologies;
potential lack of demand for OLED displays or downturns in demand for flat panel
displays in general; we and our partners failing to make sufficient advances in
OLED technology and materials research; our being unable to form or maintain
lasting business relationships with display manufacturers and others; and our
being unable to obtain and maintain appropriate intellectual property protection
for our OLED technologies and materials, or being required to incur excessive
expenditures to enforce our intellectual property rights. These and other risks
and uncertainties that could cause our actual results to differ materially from
those projected are discussed in our periodic reports filed with the SEC,
including the section entitled "Factors that May Affect Future Results and
Financial Condition" in our Annual Report on Form 10-K for the year ended
December 31, 2003. We expressly disclaim any obligation or undertaking to update
or revise any forward-looking statements contained in this document to reflect
any change in expectations with regard to such statements, or any change in
events, conditions or circumstances on which any such statements are based.
OVERVIEW
We are a leader in the research, development and commercialization of organic
light emitting diode, or OLED, technologies for use in a variety of flat panel
display and other applications. Since 1994, we have been exclusively engaged,
and expect to continue to be exclusively engaged, in funding and performing
research and development activities relating to OLED technologies and materials,
and in attempting to commercialize these technologies and materials. Our
revenues are generated through contract research, sales of development and
commercial chemicals, development and technology evaluation agreements and
license fees.
We have incurred significant losses since our inception, resulting in an
accumulated deficit of $107,089,886 as of June 30, 2004. Moreover, we expect our
losses to continue for the foreseeable future and until such time, if ever, as
we are able to achieve, from the commercial licensing of our OLED technologies
and the sale of our OLED materials, sustained licensing and chemical sales
revenues that are sufficient to support our ongoing research and development
activities and other operations.
We anticipate fluctuations in our annual and quarterly results of operations for
the foreseeable future due to uncertainty regarding:
o the timing of our receipt of license fees, contracts and fees for future
technology development and evaluation;
o the timing and volume of sales of our OLED materials for both commercial
usage and evaluation purposes;
o the timing and magnitude of expenditures we may incur in connection with our
ongoing research and development activities; and
o the timing and financial consequences of our formation of new business
relationships and alliances.
RESULTS OF OPERATIONS
Three Months Ended June 30, 2004 Compared to Three Months Ended June 30, 2003
We had a net loss attributable to common shareholders of $4,520,272 (or $0.17
per share) for the quarter ended June 30, 2004, compared to a net loss of
$4,092,994 (or $0.19 per share) for the same period in 2003. The increase in net
loss was primarily attributable to an increase in general and administrative
costs. Much of the increase in these expenses was offset by an increase in
revenues and interest income.
13
Our revenues were $1,472,023 for the quarter ended June 30, 2004 compared to
$1,391,020 for the same period in 2003. The $81,003, or 6%, net increase was
primarily due to:
o additional revenues earned under U.S. government contracts; and
o providing OLED material to a customer for its use in the manufacture of
commercial OLED displays under an agreement entered into in the third
quarter of 2003.
The increase in revenues was offset by a decrease in sales of our OLED materials
for evaluation purposes.
We earned $884,942 in contract research revenue from the U.S. government for the
quarter ended June 30, 2004, compared to $468,206 for the same period in 2003.
The increase is due to the recognition of revenue related to two completed Phase
I contracts and final billing on one completed subcontract, as well as continued
efforts on existing, active government contracts and work on new contracts
awarded after the second quarter in 2003.
We earned $259,081 from our sales of OLED materials for evaluation purposes in
the quarter ended June 30, 2004, compared to $696,592 for the same period in
2003. The decrease in this amount was mainly due to the timing of purchase of
materials in connection with the development efforts by our evaluation partners.
The amount and timing of purchases of material for development efforts by
potential OLED licensees is difficult to predict due to the early stage of the
OLED industry.
We entered into an agreement in the third quarter of 2003 under which we began
supplying one of our proprietary OLED materials to a customer for use in the
manufacture of commercial passive matrix OLED displays. As a result, we earned
$23,400 in commercial chemical revenue and $54,600 in license fees in connection
with this agreement for the three months ended June 30, 2004. We had no such
agreements in effect for the same period in 2003.
We incurred general and administrative expenses of $1,758,785 for the quarter
ended June 30, 2004, compared to $1,239,481 for the same period in 2003. The
increase was primarily a result of an increase of $120,798 in costs associated
with existing and new personnel and $293,980 in costs associated with the
issuance of stock performance bonuses to executive officers for 2003 and
estimated stock performance bonuses to employees and executive management for
2004. Prior to June 2003, we were not authorized under our Equity Compensation
Plan to issue equity compensation in the form of stock; therefore no similar
costs were recognized for the same period in 2003.
Our interest income was $231,184 for the quarter ended June 30, 2004, compared
to $53,890 for the same period in 2003. The increase was mainly due to increased
cash and investment balances in the period ended June 30, 2004. The cash and
investment balances at June 30, 2004 were $57,547,330 at June 30, 2004, as
compared to the $17,430,177 at June 30, 2003. These balances increased primarily
due to an increase in funds from our registered direct offering completed in the
third quarter of 2003 and our registered underwritten public offering completed
in the first quarter of 2004.
Six Months Ended June 30, 2004 Compared to Six Months Ended June 30, 2003
We had a net loss attributable to common shareholders of $8,627,874 (or $0.33
per share) for the six months ended June 30, 2004, compared to a net loss of
$7,961,740 (or $0.37 per share) for the same period in 2003. The increase in net
loss was primarily attributable to an increase in research and development and
general and administrative costs. Much of the increase in these expenses was
offset by an increase in revenues and interest income.
Our revenues were $3,602,013 for the six months ended June 30, 2004 compared to
$2,653,406 for the same period in 2003. The $948,607, or 36%,net increase was
primarily due to:
o additional revenues earned under U.S. government contracts;
o additional amounts earned under technology development and evaluation
agreements; and
o providing OLED material to a customer for its use in the manufacture of
commercial OLED displays under an agreement entered into in the third
quarter of 2003.
The increase in revenues was offset by a decrease in sales of our OLED materials
for evaluation purposes.
We earned $1,297,174 in contract research revenue from the U.S. government for
the six months ended June 30, 2004, compared to $837,353 for the same period in
2003. The increase is due to the recognition of revenue related to two completed
Phase I contracts and final billing on one completed subcontract, as well as
continued efforts on existing, active government contracts and work on new
contracts awarded after the second quarter in 2003.
14
We recognized $950,000 in technology development revenue in connection with two
technology development and evaluation agreements, one of which was executed in
October 2002 and the other in September 2003, compared to $500,000 for the same
period in 2003. The latter of these two agreements, which represented $450,000
of the $950,000, expired in accordance with its terms at the end of March 2004.
We earned $1,055,439 from our sales of OLED materials for evaluation purposes in
the six months ended June 30, 2004, compared to $1,316,053 for the same period
in 2003. The decrease in this amount was mainly due to timing of purchase of
materials in connection with the development efforts by our evaluation partners.
The amount and timing of purchases of material for development efforts by
potential OLED licensees is difficult to predict due to the early stage of the
OLED industry.
We entered into an agreement in the third quarter of 2003 under which we began
supplying one of our proprietary OLED materials to a customer for use in the
manufacture of commercial passive matrix OLED displays. As a result, we earned
$89,820 in commercial chemical revenue and $209,580 in license fees in
connection with this agreement for the six months ended June 30, 2004. We had no
such agreements in effect for the same period in 2003.
We incurred research and development expenses of $8,644,943 for the six months
ended June 30, 2004, compared to $8,108,248 for the same period 2003. The
increase in these expenses was primarily a result of an increase of $438,749 in
costs associated with existing and new personnel and $185,281 in costs
associated with estimated stock performance bonuses to our research and
development employees for 2004. Prior to June 2003, we were not authorized under
our Equity Compensation Plan to issue equity compensation in the form of stock;
therefore no similar costs were recognized for the same period in 2003.
We incurred general and administrative expenses of $3,608,192 for the six months
ended June 30, 2004, compared to $2,338,462 for the same period 2003. The
increase was primarily a result of the following:
o an increase of $224,459 in costs associated with existing and new personnel
and $592,774 in costs associated with the issuance of stock performance
bonuses to executive officers for 2003 and estimated stock performance
bonuses to employees and executive management for 2004. Prior to June 2003,
we were not authorized under our Equity Compensation Plan to issue equity
compensation in the form of stock; therefore no similar costs were
recognized for the same period in 2003.
o an increase of $338,800 in costs associated with the issuance of stock to
our Board of Directors for Board and Committee service in 2003. No such
issuances of stock were made in the same period in 2003.
Our interest income was $362,129 for the six months ended June 30, 2004,
compared to $113,453 for the same period in 2003. The increase was mainly due to
increased cash and investment balances in the period ended June 30, 2004. The
cash and investment balances at June 30, 2004 were $57,547,330, as compared to
the same period in 2003, which was $17,430,177. These balances increased
primarily due to an increase in funds from our registered direct offering
completed in the third quarter of 2003 and our registered underwritten public
offering completed in the first quarter of 2004.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 2004, we had cash and cash equivalents of $18,264,308, short-term
investments of $36,556,385 and long-term investments of $2,726,637, for a total
of $57,547,330. This compares to cash and cash equivalents of $14,070,207,
short-term investments of $12,811,704 and long-term investments of $3,255,574,
for a total of $30,137,485, as of December 31, 2003.
15
In the six months ended June 30, 2004, the cash used in operating activities was
$3,862,887, as compared to $3,312,481 for the same period in 2003. The increased
use of cash in operating activities was mainly due to an increase in operating
loss of $532,513 (net of non-cash adjustments) primarily as a result of hiring
additional personnel and increased general and administrative expenses.
In the six months ended June 30, 2004, cash used in investing activities was
$23,382,225 as compared to net cash used in investing activities of $5,255,981
for the same period in 2003. The increase was mainly due to an increase in
purchases of investments as a result of increased funds from financing
activities.
In the six months ended June 30, 2004, net cash provided by financing activities
was $31,439,213, as compared to $339,473 for the same period in 2003. The
increase was primarily due to our completion of the following financing
activities:
o a registered underwritten public offering in March 2004 of 2,500,000 shares
of our common stock at $12.00 per share. The offering resulted in proceeds
to us of $28,036,218, net of $1,963,782 in associated costs.
o The sale in April 2004 of 50,000 additional shares of our common stock at
$12.00 per share to cover over-allotments in connection with the public
offering completed in March 2004. The sale of these additional shares
resulted in proceeds to us of $486,031, net of $113,968 in associated costs.
o the exercise of options and warrants resulting in proceeds to us of
$2,919,515.
Working capital increased to $51,854,509 at June 30, 2004, from working capital
of $23,679,705 at December 31, 2003. The net increase was due primarily to the
net cash proceeds received from our financing activities.
We anticipate, based on our internal forecasts and assumptions relating to our
operations (including, among others, assumptions regarding our working capital
requirements, the progress of our research and development efforts, the
availability of sources of funding for our research and development work, and
the timing and costs associated with the preparation, filing, prosecution,
maintenance and enforcement of our patents and patent applications), that we
have sufficient cash, cash equivalents and short-term investments to meet our
obligations for at least the next 12 months. We believe that our potential
additional financing sources include long-term and short-term borrowings, public
and private sales of our equity and debt securities and the receipt of cash upon
the exercise of warrants and options. We have an effective shelf registration
statement that would enable us to offer, from time to time, up to $44,725,524 of
our common stock, preferred stock, debt securities and other securities, subject
to market conditions and other factors. It should be noted, however, that
substantial additional funds will be required in the future for research,
development and commercialization of our OLED technologies and materials, to
obtain and maintain patents respecting these technologies and materials, and for
working capital and other purposes, the timing and amount of which are difficult
to ascertain. For example, under our 1997 Research Agreement with Princeton
University, we are required to pay Princeton University $1,495,599 per year
through July 2007. There can be no assurance that additional funds will be
available to us when needed, on commercially reasonable terms or at all.
CRITICAL ACCOUNTING POLICIES
Refer to our Annual Report on Form 10-K for the year ended December 31, 2003 for
a discussion of critical accounting policies.
CONTRACTUAL OBLIGATIONS
Refer to our Annual Report on Form 10-K for the year ended December 31, 2003 for
a discussion of our contractual obligations. In July 2004, we signed a one year
lease for 1,609 square feet of space in Monmouth Junction, NJ for OLED
technology development activities. The minimum rental payments to be made under
this lease is $38,616.
OFF-BALANCE SHEET ARRANGEMENTS
Refer to our Annual Report on Form 10-K for the year ended December 31, 2003 for
a discussion of off-balance sheet arrangements. As of June 30, 2004, we had no
off-balance sheet arrangements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We do not utilize financial instruments for trading purposes and hold no
derivative financial instruments, other financial instruments or derivative
commodity instruments that could expose us to significant market risk. Our
primary market risk exposure with regard to financial instruments is to changes
in interest rates, which would impact interest income earned on investments.
ITEM 4. CONTROLS AND PROCEDURES
Our management, with the participation of our Chief Executive Officer and Chief
Financial Officer, evaluated the effectiveness of our disclosure controls and
procedures (as defined in Rule 13a-15(e) under the Exchange Act) as of the end
of the period covered by this report. Based on this evaluation, our Chief
Executive Officer and Chief Financial Officer have concluded that our disclosure
controls and procedures, as of the end of the period covered by this report, are
functioning effectively to provide reasonable assurance that information
required to be disclosed by us in our reports filed or submitted under the
Exchange Act is recorded, processed, summarized and reported within the time
periods specified in the SEC's rules and forms.
16
There have been no changes in our internal control over financial reporting that
occurred during our last fiscal quarter and that have materially affected, or
are reasonably likely to materially affect, our internal control over financial
reporting.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable.
ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY
SECURITIES
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) We held our 2004 Annual Meeting of Shareholders on June 16, 2004.
(b) Per Instruction 3 to Item 4 of Form 10-Q, no response is required.
(c) The number of votes represented at the annual meeting, in person or by
proxy, was 26,698,885. In determining this number, abstentions and shares held
by brokers who have notified us that they lack voting authority with respect to
any matter (referred to herein as "broker non-votes") were deemed present. The
matters voted upon at the annual meeting and the results of the vote on each
such matter are set forth below:
1. Election of Directors. The result of the vote tabulated at the
meeting for the election of seven directors is set forth as follows, opposite
their respective names:
NUMBER OF VOTES NUMBER OF VOTES PERCENTAGE FOR OF
NAME FOR WITHHELD TOTAL VOTES CAST*
---- --- -------- -----------------
Steven V. Abramson 24,110,383 2,588,502 90.3
Leonard Becker 25,167,707 1,531,178 94.2
Elizabeth H. Gemmill 25,040,507 1,658,378 93.7
C. Keith Hartley 25,167,707 1,531,178 94.2
Lawrence Lacerte 24,028,207 1,670,678 90.0
Sidney D. Rosenblatt 23,800,376 2,898,509 89.1
Sherwin I. Seligsohn 23,963,183 2,735,702 89.7
* Broker non-votes are not considered votes "cast" with respect to the election
of directors.
2. Proposal to Amend the Company's Equity Compensation Plan. The result
of the vote tabulated at the meeting for the ratification and approval of this
proposal was as follows:
NUMBER OF VOTES NUMBER OF VOTES NUMBER OF PERCENTAGE FOR OF
FOR AGAINST ABSTENTIONS TOTAL VOTES CAST*
--- ------- ----------- -----------------
11,420,191 4,371,450 193,944 71.4
* Abstentions with respect to this proposal have the effect of a negative vote.
Broker non-votes are not considered votes "cast" with respect to this
proposal.
(d) Not applicable.
17
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
The following is a list of the exhibits filed as part of this report.
Exhibit
Number Description
- ------- -----------
31.1* Certifications of Sherwin I. Seligsohn, Chief Executive Officer, as
required by Rule 13a-14(a) or Rule 15d-14(a).
31.2* Certifications of Sidney D. Rosenblatt, Chief Financial Officer, as
required by Rule 13a-14(a) or Rule 15d-14(a).
32.1** Certifications of Sherwin I. Seligsohn, Chief Executive Officer, as
required by Rule 13a-14(b) or Rule 15d-14(b), and by 18 U.S.C.
Section 1350. (This exhibit shall not be deemed "filed" for purposes
of Section 18 of the Securities Exchange Act of 1934, as amended, or
otherwise subject to the liability of that section. Further, this
exhibit shall not be deemed to be incorporated by reference into any
filing under the Securities Act of 1933, as amended, or the
Securities Exchange Act of 1934, as amended.)
32.2** Certifications of Sidney D. Rosenblatt, Chief Financial Officer, as
required by Rule 13a-14(b) or Rule 15d-14(b), and by 18 U.S.C.
Section 1350. (This exhibit shall not be deemed "filed" for purposes
of Section 18 of the Securities Exchange Act of 1934, as amended, or
otherwise subject to the liability of that section. Further, this
exhibit shall not be deemed to be incorporated by reference into any
filing under the Securities Act of 1933, as amended, or the
Securities Exchange Act of 1934, as amended.)
* Filed herewith.
** Furnished herewith.
(b) Reports on Form 8-K:
None.
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SIGNATURES
Pursuant to the requirement of the Securities Exchange Act of 1934, the
registrant has duly caused this report on Form 10-Q for the quarter ended June
30, 2004, to be signed on its behalf by the undersigned thereunto duly
authorized.
UNIVERSAL DISPLAY CORPORATION
Date: August 5, 2004 By: /s/ Sidney D. Rosenblatt
---------------------------------------------
Sidney D. Rosenblatt
Executive Vice President, Chief Financial
Officer, Treasurer and Secretary
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